Why America’s Charities Are So Uncharitable

All you need is a stamp, $400, and to fill out some forms. A charitable purpose? Not really.

Nastia Liukin (right) visits with Emily Crowley at Boston Children’s Hospital in 2010. The charitable hospital was recently cited in a government report for its high charges despite sitting on $2.6 billion in investment assets.

Photo by Gail Oskin/Getty Images for Boston Children’s Hospital

In the 2009 movie Whip It, Ellen Page plays Bliss Cavendar, a 17-year-old from Bodeen, Texas. Bliss is a social misfit yearning to break out of the constraints of small-town culture. After spotting a flier on a trip to Austin, she finds refuge in the speed, violence, and vaguely illicit appeal of Roller Derby. Skating under the name of “Babe Ruthless,” she becomes a star, a vision of youth and purity amid the tattoos and beer-soaked sexuality of the sport. But her passion for skating quickly collides with her mother’s view of feminine propriety. Mom is horrified to discover her daughter’s love of Roller Derby and tries to bar her from the championship match.

What Bliss needed was a better strategy. She should have argued that her Roller Derby competitions were a socially sanctioned charitable activity, akin to the Red Cross or—better yet—the Junior League. Meet the Renegade Roller Girls of Bend, Ore. Like their fictitious Texas cousins, they promise violence and scantily clad action in the “hottest show in town, with our no holds barred play,” and they display the same affection for in-rink violence. But unlike the league in the movie, they do not operate in the shadows of abandoned warehouses; instead, they are registered as a 501(c)3 organization, approved as a public charity by the Internal Revenue Service.

The Renegade Rollers are hardly alone. In 2008, the same year that the roller-skating outfit received its charitable status, the IRS approved, along with 50,000 other new charities, the applications of the All Colorado Beer Festival and the Grand Canyon Sisters of Perpetual Indulgence. In fact, the IRS routinely approves more than 99.8 percent of the applications it receives for public charity status, often in very short order. In truth, starting a charity takes little more than a stamp, $400 for the filing fee, and a passing facility for filling out government forms.

There are more than 1.1 million charities in the United States, and it is perhaps not surprising that some cases slip through the crack. But the story of the Renegade Roller Girls reveals something more basic about our system for identifying what is or is not a charity. Roughly put, we don’t have one. The failure of the IRS and other regulators to act as gatekeepers has consequences that go beyond a few amusing anecdotes. There are substantial economic costs in the form of lost income tax and property tax revenue from organizations that hardly qualify as charities (as well as the deductions taken by their donors). It also means that more and more charities are competing for a finite amount of money from public and private donors, diminishing the effectiveness of real charities. And when people become aware of this problem, it’s understandable that they come away feeling that many charities are downright uncharitable.

Charitable hospitals are perhaps the best example. They are a linchpin in the American medical system, accounting for about two-thirds of all Medicare beds in this country. And while they are only about 1 percent of the country’s charities, charitable hospitals collect 43 percent of all charitable revenue, about $650 billion a year.

The phrase charity hospital may still conjure up images of scruffy floors, Jell-O-laden dinner trays, and volunteer nuns, but that isn’t the reality anymore. Charitable hospitals can be extraordinarily luxurious. Witness the Greenberg Pavilion at the New York-Presbyterian/Weill Cornell Medical Center, which advertises its hotel-like amenities such as Frette bed linens and original works of art. (A hospital room there can run $2,400 a night.) And they can be extraordinarily profitable, too. Leaders of charitable hospitals routinely are paid into the seven figures, even more on some occasions. In fact, charitable hospitals are far more likely to make money: 77 percent of charitable hospitals are profitable compared to 61 percent of for-profit institutions. Some are immensely profitable, such as Boston Children’s Hospital, which was recently cited in a government report for its high charges despite sitting on $2.6 billion in investment assets.

The purpose here is not to demonize charitable hospitals; they are the product of a changing business, regulatory, and health care system. Charitable hospitals are not worse than for-profit hospitals; they are, in fact, fundamentally the same. In 2006, the Congressional Budget Office compared for-profit and charitable hospitals across various critical service criteria and found only the smallest differences between them. The CBO study found the charitable hospitals to be slightly more likely to provide uncompensated and specialized services; on the other hand, for-profit hospitals were modestly more likely to provide Medicare or Medicaid services and to serve economically disadvantaged neighborhoods. It is hard to come away from the CBO study with the view that there are any significant business differences between the two, which makes the lucrative charitable tax exemption that charitable hospitals receive all the more puzzling. Illinois, for one, has tried to strip several of its charitable hospitals of their tax exemptions for just this reason.

It’s hard to understand why some organizations receive charitable status and others do not. One of our core, and fairly obvious, organizing principles is that a charity must dispense a public service rather than a private good. But many of our most prominent civic charities would struggle to meet that basic test. Tickets to symphonies, operas, and the like are often so prohibitively expensive that their primary services effectively exclude everyone but the well-off.

Private schools are perhaps an even better example, not only because they charge enormous tuition fees but also because they are of questionable social value. Average costs at prep schools exceed $10,000 a year—a figure that has skyrocketed in recent years—and can reach more than $40,000 in some cases. Not surprisingly given these costs, private school students tend to be wealthy, white, and from much better educated families than their public school peers. Nevertheless, we grant these institutions of privilege charitable and tax-exempt status, even though they unquestionably lead to greater social and economic stratification through the hollowing out of the public school system. Private schools are of course largely supported by their tuition fees, but the benefits they receive from their charitable status are substantial. Indeed, sometimes it is that very status that leads the superwealthy to make incredible gifts to some very fortunate schools. Take, for example, the $49 million Ethel Allen left the Hackley School in Tarrytown, N.Y., last year, or the $50 million gift by casino magnate Sheldon Adelson to support the Adelson Educational Campus in Las Vegas.

It may seem that changing the charitable status for private schools is unthinkable. Perhaps, but it has been tried before. In 2009, the British Charity Commission revoked the charitable charters for two private schools, finding that they provided too little in the way of financial aid to needy students. While the commission’s ruling was ultimately overturned by the courts, the commission’s position still stands for the common sense notion that charities should demonstrate a public benefit in order to maintain their charitable status. When so much of the American charitable sector seems so uncharitable, it is perhaps time we remind ourselves what a charity is really supposed to be.